What Will the Fed Do at Its Next Meeting?

The Federal Reserve is widely anticipated to maintain its federal funds target rate at 4.25%-4.50% at its upcoming late July meeting, with market probabilities for a cut at less than 5%. This consensus, supported by experts and market data, stems from persistent inflationary pressures, evidenced by June's CPI rising to 2.7% year-over-year, and a robust labor market, which reduces the urgency for rate cuts. While market participants still project two 25 basis point cuts this year, the first is not expected before September, as the FOMC prioritizes assessing the full impact of tariffs on prices and gathering further economic data.

Analysis

A strong consensus among market participants and economists indicates the Federal Reserve will maintain the federal funds target rate at 4.25% to 4.50% at its upcoming July meeting. CME Group's FedWatch tool assigns a greater than 95% probability to this outcome, reflecting a cautious stance driven by recent economic data. The primary impediment to a more dovish policy is resurfacing inflation, with the June Consumer Price Index (CPI) accelerating to 2.7% year-over-year from 2.4% previously, and core inflation rising to 2.9%. Several strategists, including those from Bank of America and BMO Economics, attribute this uptick to firms beginning to pass on tariff-related costs to consumers, a development the Fed is closely monitoring. This inflationary pressure, combined with a solid labor market, provides the Federal Open Market Committee (FOMC) with justification to delay rate cuts. While market expectations still price in two 25-basis-point cuts this year, conviction for a September reduction has weakened, with traded probabilities falling from 66% to 60% in a week, as the Committee awaits further data from the July and August CPI reports to assess the persistence of these price pressures.

Key Decisions for Investors

• Given the consensus that the Fed will remain on hold due to sticky inflation, investors should temper expectations for a near-term, rate-cut-driven equity market rally and monitor upcoming CPI reports as a key risk indicator.
• Portfolio positioning should account for a delayed rate cut timeline, as the probability of a September cut is diminishing and some economists now suggest cuts may be pushed into 2025 if inflation persists.
• For fixed income investors, yields may remain elevated in the short term, but the underlying expectation for eventual cuts later in the year suggests focusing on high-quality duration while watching for entry points driven by inflation data volatility.